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(P)GCC Cumulative Fiscal Deficit at $900b

The (Persian) Gulf Cooperation Council countries will have to create new revenue streams as lower oil prices may keep their budgets in deficit in the medium term, indicates a recent report by the International Monetary Fund.

IMF estimates a cumulative fiscal deficit of $900 billion for the six (Persian) Gulf Arab nations (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) and Algeria between 2016 and 2021, news outlets reported.

Revenue mobilization should focus on designing broad-based tax systems; it says and notes that the (P)GCC is planning to introduce a VAT or value-added tax in the coming years.

Revenue measures by way of value-added tax can contribute to lifting the GDP of the Arab states.

For example, introducing a 5% VAT could raise about 1.5% of GDP by 2018, points out IMF regional chief Masood Ahmed.

But, he stresses such measures will take longer for effective implementation, and hence the authorities concerned should ensure “implementing them in a sustained way, and building the institutional capacity to be able to do this is going to be important”.

On average, the (P)GCC countries spend twice as much on their public wage bills as other emerging market and developing countries, and almost 50% more on public investment as a share of GDP, the IMF report said.

Many in the grouping can introduce phased adjustments thanks to the “comfortable financial surplus” amassed over years of high oil revenues, he suggests.

The budgets of almost all non-(P)GCC countries are also projected to remain in deficit by the end of the decade.

Saving Measures

Therefore, IMF says further saving measures are needed over the medium term to restore fiscal sustainability, rebuild buffers, and save sufficiently for future generations.

In the six-nation council, ambitious fiscal consolidation is also required to support the fixed exchange rate regimes.

Oil prices have shed some 70% from their mid-2014 peak value to $40 a barrel. The IMF says markets expect prices to recover modestly to $50 by the end of this decade.

Export receipts in Middle East and North Africa (Mena) oil exporters have declined by $390 billion last year, which represents 17.5% of their GDP in 2015.

The ample surpluses of the (P)GCC countries besides Algeria, another major oil exporter in the Mena region, have turned into significant deficits, projected to average 12.75% of gross domestic product in 2016 and remain at 7% over the medium term, despite the implementation of sizeable deficit-reduction measures.

Surpluses Turns Into Deficits

Over the past decade, oil exporters in the (P)GCC states and the wider Mena region had enjoyed large external and fiscal surpluses and rapid economic expansion on the back of booming oil prices.

However, with oil prices plunging in recent years, surpluses have turned into deficits and growth has slowed, raising concerns about unemployment and financial risks.

In addition to balancing their budgets, the (P)GCC members face a major challenge ensuring that the private sector grows in a way that provides employment, Ahmed says.

Clearly, it should be the immediate priority of the (P)GCC countries to revitalize their private sector and create incentives for nationals to seek private sector instead of public sector jobs.

An economy that depends on a single commodity will be at risk during a period of sluggish growth. For this reason, diversifying economies away from oil and gas is the need of the hour.

This, as IMF says, will be a real transformation of the economies going forward.

Saudi Arabia sealed its first loan in at least 15 years as it seeks to fill a budget hole estimated at about $100 billion this year.

The government will pay lenders about 120 basis points above the London interbank offered rate, including margin and fees, for the $10 billion facility. The loan will have a tenor of five years. Qatar raised a $5.5 billion five-year loan priced at 90 basis points above Libor in December.